Podcast Episode - Suze School: What You Need To Know About The 55 or Older Rule

401k, Emergency Fund, Retirement, Roth IRA

January 28, 2024

On this Suze School, we get a lesson on how to stay financially healthy by accessing money in our retirement accounts, if we are under 59 and a half.

Listen to Podcast Episode:

Podcast Transcript:

January 28th, 2024. Welcome everybody to the Women and Money podcast as well as everybody smart enough to listen, Suze O here and today is Suze School and of course, today is also the final playoffs before the Super Bowl for the NFL. I don't even know who I'm rooting for besides obviously Kansas City.

You know, because I'm originally kind of from San Francisco for 23 years of my life, but I am so somebody who roots for the underdog and I have to tell you Detroit, I'm a rooting for you here, but if you end up in the Super bowl against the Kansas City Chiefs, well, I'm gonna go with the Kansas City Chiefs all the way, whether they win or not, they're always gonna be the team I root for or at least as long as Mahomes is quarterback there.

Anyway, few things, an announcement and I want you to take this to heart as you know, Alliant Credit Union has some of, if not the highest interest rates on their certificates of deposits, especially their 18 month one. And remember it can be 18 months all the way up to 23 months and really 30 days, which makes it almost a two year certificate of deposit. You choose your maturity currently, that interest rate is at 5.3% or 5.35% for amounts that are $75,000 or more. Remember, you only need $1000 to lock up that rate.

I have told you and I'm going to tell you again when interest rates start to go down as they are. Now that I did not know how long, especially on the longer term one, I'm not worried about the 12 month one, which is currently, by the way at 5.4%. And remember the 12 month one can also go from 12 months all the way up to 17 months and 30 days, which essentially makes it 18 months.

But that rate is at 5.4% for anything under $75,000 and 5.45% for amounts of $75,000 or more. But let's get back to the 18 month because it's the longer term rates right now that are starting to come down everywhere.

When I see rates starting to be lowered on 18 month CDs, two year CDs at many of the major financial institutions. What that says to me is that sooner than later Alliant Credit Union will absolutely do the same thing on their 18 to 23 month certificate of deposit.

So if you are somebody who wanted to lock in the current interest rates there for a longer period of time for right now, I'm telling you, you do not have time to waste as you are listening to this again on January 28th, I would imagine you have two or three days left to actually do that before those rates may change. Now, I don't know that for a fact. Nobody has said anything to me that it's just one of those things because remember I watch interest rates everywhere all the time. I actually watch them more than I do stock prices and I just have a feeling. So if you're interested in the longer term, the 18 to 23 month certificate of deposit at Alliant Credit Union, go to my Alliant... That's myalliant.com. Look for my picture. It is there. And again, if you want to lock in for a little bit shorter, the 12 to 17 month, don't pass up the 5.4 or 5.45% on that one because you never know when that 1 may change as well. We'll have to see what happens today. Absolutely. Get out your little Suze notebooks. I bet you they're not so little anymore.

I bet you they are getting thicker and thicker and I was thinking how I've been talking a lot about, obviously, as I always do retirement accounts. And a little bit ago I did a thing on retirement accounts versus investment accounts and then somebody wrote in and they asked me, would I do a Suze school on the 55 or older rule.

And I thought, you know what, I think it's kind of time to do that again because I think it's really important that you understand why a 401k especially a pretext, one gives you more accessibility to your money as you get older than a traditional Ira. Ok.

I need you to listen to me for a second, here.

There are many times that things happen in your life, whether it's expected or unexpected, they just happen. And one of those things possibly could be that as you're approaching your late fifties or your middle fifties, either something happens and you cannot work anymore, but yet you need access to the money that's in your 401k plan.

But yet you can't take a loan from it at this point in time because you won't be working there anymore or you can't withdraw it without penalty in your mind anyway, until you're at least 59 and a half years of age.

So I want to introduce you to something that most people don't even have a clue that exists and why it exists only in a 401k plan and not in an IRA and that is called the rule of 55 and what the rule of 55 says and this is for 401k, 403 B and TSP plans only.

It says if you separate from service, that means if you are fired, if you leave voluntarily, it does not matter why you leave or quit the place that you are working at again, even if you are fired and you have a 403 B 401k or TSP, an employer sponsored plan.

And you have money in that plan that if you separate service when you are 55 years of age or older in now underline in, in the year that you terminate service, you can access any money in your employer sponsored plan without the 10% penalty. That is a big deal. Everybody, it gives you access to the money in your 401k and alike plans.

Now, I want you to understand exactly how this rule works because many of you think if your money is in a retirement plan, whether it's a 401k and just let's now say when I say 401k, I mean, all of them at work, 403 B or TSP that you have to be 59 and a half or older to access that money without a 10% federal tax penalty and whatever your state tax penalty may be as well.

But for money in a 401k, if you separate service in the year that you turn 55 or older there is no 10% penalty. Now, why did I ask you to underline the word in?

Because let's say it is right now January of 2024. And right now you are 54 and your birth date is December 31st 2024 when you are going to turn 55. But in February of this year, you quit, you get sick, you have to leave service, they fire you. The reason you leave service or separate service does not matter the fact that you are going to be 55 or older in the year that you left service, which you would be in this example because you turn 55 December 31st, 2024. Even though it is the last day of 2024 you still qualify for the 55 or older rule, which means you can access any of the money within your 401k at that point or whenever you want after that without having to wait till 59 and a half without penalty.

Now, obviously, especially if it's a traditional 401k, you're going to have to pay ordinary income taxes on it, but not having to pay 10% to the government in penalty and whatever your state penalty is, it could be 2%.

That is like I said, a big deal.

Now, the reason that I want to tell you this is that many of you when you quit or you leave or you're fired and you have money in a 401k.

You tend, and I have told you to do this, you tend to take the money in your 401k and roll it over to an IRA rollover account where you have many more investment choices and things like that.

But in an IRA of any kind, the 55 or older rule does not apply there. You have to wait in most cases till you're 59 and a half years of age or older. Now, I will explain another rule for IRAs in a second that allows you to get to your money without the 10% penalty regardless of your age.

But here is my advice to all of you if you are not 59 and a half years of age yet, and you have left service or plan to leave service, maybe to find another job, maybe to retire and you have money in a 401k plan at your employer.

Soon to be your ex-employer and you are under the age of 59 and a half. But you are going to turn 55 years of age or older in the year that you're leaving service. Maybe look at rolling some of the money over to an Ira rollover, but leave an amount in your 401k plan that you may think you need to access over the next few years and you want to access it without the 10% federal penalty and whatever the state penalty is going to be.

Did that make sense to you? So, when I was doing the retirement planning for all of Pacific Gas and Electric, the utility company in northern California, and they had early retirement many times and about 7000 people retired the last time I did it for them before I went out on my own. I had all of these people because it was early retirement.

Most of them had just turned or were going to turn 55 years of age or older in the year that they were choosing to take early retirement.

I had many of them leave the money that they would need to get all the way through to 59 and a half right in their 401k at Pacific Gas and Electric for the money above that, that they knew they were not going to need that money we did in IRA rollover with. So you do not have to be an all or nothing investor where you do something with all of your money or you do nothing with all of your money. You have choices, but this is something that you absolutely need to know about because for the Women and Money Podcast, my listeners tend to be older in their fifties.

And so I know you're like, so I don't feel like that's older, but you know what I'm talking about. All right, so don't get insulted on me. Here. But this is something that you need to keep in mind if anything happens to you and you need to separate from service in the year that you are going to be 55 or older.

I just have to say something. Obviously, if you are 59 and a half already, none of this matters because now you already have attained the age that the 10% penalty does not apply. So for you, if you wanted to, you could absolutely do an IRA rollover with all of the money in your 401k and it really won't matter in most cases.

Next, maybe you've already separated from service. You were not 55 years of age or older or you were 55 but you didn't know about this rule. Maybe you were 5657 and you did an IRA rollover with all of the money within your 401k and now it's sitting in an IRA but you cannot access it until the age of 59 and a half without the 10% penalty. Here's something else you need to know.

Let's say you are in a situation and now you've left, you haven't been able to find another job that you want, but you need that money that's in there that's locked up in your mind for another two years or three years. Maybe even a lot longer rather than just taking it out and paying a penalty again. You're always gonna have to pay ordinary income taxes on it unless it was a Roth 401k or Roth IRA or you did an IRA rollover and then converted to a Roth IRA and then started to take money from there.

But if you haven't done that and your money is in a traditional IRA rollover from your 401k, let's say, or even if you just have money in a traditional Ira, there's something known as the rule of 72 T that is in the IRS code of it. And what it says is you can take money out of your traditional IRA without the 10% penalty.

As long as you take it out with something that is known as separate but equal periodic payments. Those payments could be once a year, those payments could be every month, those payments could be every quarter, but those payments have to be separate, but they have to be equal every single withdrawal and you have to do it, write this down for at least five years or 59 and a half, whichever one comes later.

So what that means is this is something that you can think about doing if you're in your mid fifties. This is not something that I recommend you do just to get at your money without the 10% penalty when you're in your thirties or your forties. This is what you do when you're approximately 55 years of age and you need access to your money and you want to do so without the 10% penalty.

If you do that and you take these withdrawals out every month or every few months, whatever it may be for at least five years or 59 and a half, whichever one comes later, then you will not have to pay the 10% federal tax penalty as well as the state penalty if you live in a state that charges a penalty.

Now, remember everybody with the two strategies that I talked about today, you absolutely will owe ordinary income taxes on whatever withdrawals you make. Regardless of your age.

Both these rules can be pretty complicated and you really need to know, especially if you do the 72 T so you need to work with your tax advisor.

Especially again, I'm repeating if you do rule 72 T. Now when I was doing the retirement planning for Pacific Gas and Electric, I have to say I became an incredible expert on this. Probably I knew more about it than anybody in the entire United States because I advised thousands of people about these rules, especially if they did rule 72 T...

I figured out for them exactly how much they should take out. These are two things that are really, really important for you to know about. And even if you are younger right now, you're listening to this and you think it doesn't apply to you. If you think you're not gonna get older. If you think you're not going to be one day 40 50 60 70.

Well, I have a bridge to sell you. You wanna get older? You don't want the alternative, which means you never got there. You want to really get older but you wanna get older and you wanna be healthy. So you wanna stay exercising and eat the right food and know the right moves to make when it comes to your health.

So as you get older, you don't feel like you're aging and when it comes to your money, you want to do the same thing, you want to work with it and make the right moves and know what you need to do. So when you do get older, what is the right financial exercises that you need to deploy to make sure that your money stays healthy and strong as well. So you need to listen to these things and not just think, oh, this doesn't apply to me.

Everything I talk about on the Women and Money podcast as well as everybody smart enough to listen.

It applies to all of you at one point in your life. If you're older and you already have it together, you make sure that your kids know about it. If you're younger and you have older parents right now, you make sure that your parents know about this. But everything on this podcast is to make sure that you are the healthiest, wealthiest people around. All right, everybody I'm signing off because I'm gonna get ready in a little bit. Actually, it's not till three o'clock east coast time for the football games.

But really, there's only one thing that I want you to remember when it comes to your money and it is this people first, then money, then things now you stay safe and stay unstoppable.

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